The semiconductor industry has been struggling on Wall Street amid signs that a slowdown was coming. On Tuesday afternoon, doubters seemed to receive confirmation.

Texas Instruments Inc.
TXN, +2.64%TXN, +2.64%
said it is seeing a slowdown in demand, its first since 2015, in a third-quarter earnings report after the bell. Chief Executive Rich Templeton, in his first comment in the announcement, proclaimed, “demand for our products slowed across most markets.”

TI execs did not believe it was just a problem in the third quarter, as the company’s guidance was lower than expected, and executives were plain in the conference call Tuesday afternoon about signs of a slowdown in semiconductor demand.

“We’re heading into a softer market, and we plan to execute as we have in the past,” Chief Financial Officer Rafael Lizardi said, adding that the company plans to be disciplined with its operating plan and reduce its number of wafer starts, meaning that it will build fewer semiconductor wafers.

TI shares slumped 6% in the after-hours session and extended those losses slightly in premarket trade Wednesday. And while TI execs tried to be careful not to bring the entire industry into its forecast — “We believe this is mostly driven by a slowdown in semiconductors, meaning we really can’t speak to any macro-driven event,” Lizardi said in response to an analyst question — the news quickly reverberated. To add to the fears, MKS Instruments Inc.,
MKSI, +5.73%
a maker of testing equipment for semiconductor companies, said that its sales to chip makers fell 8% compared with a year ago, and its shares slipped 1.46% in after-hours.

The news seemed to confirm the worst fears of investors in recent weeks, that a slowdown was looming amid reports of inventories building up. Last week, Morgan Stanley analysts wrote in a report that the degree of oversupply that has been building up among customers is far worse than it was in 2015, the year of the last downturn. Earlier on Tuesday, chip stocks presciently anticipated the news, with the Philadelphia Semiconductor Index
SOX, +3.46%forming a so-called technical “death cross,” an indicator that a bear market is on the horizon.

Another big looming question is whether a slowdown will turn into a full-fledged downturn, returning chips to a cycle that many executives swear they have exited. An industry downturn would poke holes in the recent theory that the $400 billion-plus semiconductor industry is no longer cyclical in nature.

“Where it goes from there and how long it lasts are just things that we don’t know,” said David Pahl, TI’s director of investor relations. “We’ll be in a position with what we’re doing with wafer starts that if it’s a more shallow correction, we’ll be prepared to support it on the other side. If it’s longer-lived, we will be monitoring our wafer starts on a daily basis and we know how to react in those situations.”

Nearly every single question on TI’s call was an attempt to get more color on the slowdown and what was causing it. One analyst asked if the company was seeing an impact from the most recent $200 billion in tariffs on Chinese goods. The tariffs are expected to affect U.S. tech companies and consumers because many U.S. made or designed tech products are assembled in China and are subject to the tariffs. TI said it did not attribute the slow down to the tariffs on China.

“As we have said before, the direct effect of the tariffs for us on any of the trade issues is minimal,” Lizardi said. “It’s really not there. So all we can judge is by what we see right in front of us, what our customers, the signals they send us, and that’s what we’re basing this on.”

But as Chad Kusserow, a portfolio manager who manages his family office, said on Twitter, he was surprised that TI doesn’t think that the tariffs are affecting the plans of equipment makers.

Really hope $TXN has a better handle on things than what they're conveying on conf call- said it's just a semi thing, not nec impacted by the China/tariff situation- their oversimplified response is that it's just a slowdown after a long period of growth- well yeah but

“Taking it all on its face value, we could be looking at an actual slowdown, the question is what kind of slowdown is it going to be?” said Eric Ross, an analyst with Cascend Securities. “If we go into a real drag-out trade war, it could be worse than expected.”

But the big question is whether chip maker customers have too much inventory and they are working through it, or if market demand has dried up and a real downturn ensues. “We are still hearing that people still want the stuff, the end market demand for some stuff is good,” he said.

Semiconductor companies are often considered “canaries in the coal mine” because they can see demand trends before more consumer-focused companies, so any issues with chip companies could eventually spread to the rest of tech. Investors will want to keep a close eye on Intel Corp.
INTC, +1.86%
and AMD when they report later this week to see if this is a TI problem or much larger.

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